(Corrects to show Summit’s compensation was fee-based in
paragraph after ‘Just Looks Bad,’ in story published April 15.)

April 15 (Bloomberg) -- The deal came together behind the
doors of a Louisiana psychiatric ward. John Skannal, 74, signed
a document in October 2003 authorizing the sale of land handed
down through eight generations of his family.

The buyer was a statewide pension plan for municipal law
officers. The fund assembled golf and real estate holdings that
lost 84 cents on each dollar the police spent on them over 10
years. The losses are emblematic of a decade in which the $1.2
billion program went from fully funded to $836.3 million short
of meeting future retirement obligations.

The nine trustees of the Municipal Police Employees’
Retirement System made a series of decisions that taxpayers and
10,748 active and retired cops are now paying for. The board
embraced bad investments, ignored warnings of weak financial
controls that enabled its attorney to steal $1.2 million and set
up conflicts of interest among its advisers, according to a
review of thousands of pages of documents obtained under the
state public records act and more than 50 interviews.

“It was like a gigantic playhouse,” says Nick Congemi,
68, chief of the Greater New Orleans Expressway Police in
Metairie, who for years criticized the system’s leadership and
investments. “These people have taken the futures away of good,
decent law-enforcement officers who thought they could depend on
this for the rest of their lives.”

$479.6 Billion Deficit

The irregularities in the Louisiana police plan show how
trustees and employees of U.S. public pensions, operating with
little or no oversight or transparency, can cost taxpayers and
threaten the retirement income of government workers. Assets
held by state systems are $479.6 billion less than what is
needed to fund estimated obligations, according to official
financial reports compiled by Bloomberg.

In California, Democratic Governor Jerry Brown brought
civil charges last year when he was attorney general against a
former CEO and a former board member of the $233.5 billion
California Public Employees Retirement System, the largest in
the U.S. State and federal proceedings are continuing. In March,
Calpers documented six years of unreported gifts by members of
the board and employees, and improper awarding of investment
contracts that paid excessive fees.

Cuomo Probe

Before becoming New York’s Democratic governor, Andrew
Cuomo probed corruption at the state’s $140.6 billion pension
fund when he was attorney general, leading to eight guilty pleas
and the payment to the state of more than $170 million.

Alan G. Hevesi, the former Democratic state comptroller who
was the program’s sole trustee, was sentenced today to a minimum
of one year in state prison after admitting he approved pension-fund investments in exchange for almost $1 million in gifts.

“I publicly disgraced myself,” Hevesi told a Manhattan
judge at his sentencing hearing. “I have only myself to
blame.”

Randy P. Zinna, 53, the former attorney for the Louisiana
police fund, pleaded guilty last year to mail fraud after state
and federal investigators accused him of embezzling to pay
sports-gambling debts.

Louisiana’s 13 statewide plans had unfunded liabilities for
fiscal 2010 of $20 billion, with enough assets to cover 65
percent of estimated obligations, according to their latest
financial statements.

Funding-Review Panel

Among 45 U.S. states reporting data for fiscal 2009,
Louisiana ranked 41st based on proportion of future pensions
covered by assets, according to data compiled by Bloomberg. The
Legislature next month will consider recommendations by a
funding-review panel to increase mandatory contributions and
require governance changes.

The law-enforcement fund, known as MPERS, was the fourth-worst funded among statewide plans. The program’s assets were 2
percent lower last June 30 than a decade earlier. Kelly Gibson,
a Lafayette police lieutenant who is the board chairman,
declined to discuss previous decisions.

“The only comment I will make is that the current board is
working to correct any problems that face MPERS,” Gibson said
in an e-mail.

Over the U.S. Independence Day holiday in July 1999, three
police-retirement board members spent four days at a golf resort
on Monterey Bay in California at the pension fund’s expense. It
was a “due diligence” investigation of a potential “real
estate investment,” according to their expense reports.

Former Pawn Shop Owner

The trustees were led by Bossier City Police Captain Bill
Fields, a Corvette-driving former pawn shop owner who chaired
the pension’s golf-course committee, and its vice chairman,
Willie Joe Greene, a retired captain from nearby Keithville.
Fields, now 58 and retired, and Greene, 73, declined requests to
comment for this story.

The third member of the West Coast trip was retired New
Orleans police Sergeant Larry Reech, 62, who says the trio
visited golf courses on a former military base in which the New
Orleans Firefighters’ Pension and Relief Funds had invested.

“We were looking at how they were being run, what kind of
draw they had -- what kind of clientele -- where they were
coming from, the demographics,” Reech says.

As for the stewardship of the board, “oversight was
lacking,” he says. “There were mistakes made.”

Cotton Plantation

The committee was in the hunt for golfing properties near
the homes of Fields and Greene in northern Louisiana, pension
records show. It was close to the peak of the U.S. golf boom.

At the time, Fields cited the success of golfing
investments by the Alabama Retirement System, the records show.
He zeroed in on the Olde Oaks Golf Club in Haughton, Louisiana.
With fairways lined by oak and cypress trees, the course was
built on rolling hills carved out of a former cotton plantation
owned since 1846 by the family of John Skannal, the man who
later sold the officers’ fund an adjacent piece of land.

The course was designed by the professional golfer Hal
Sutton, a Shreveport celebrity known for having defeated golfing
legends Jack Nicklaus and Tiger Woods. Even after a consultant’s
report said that construction was incomplete and some cart paths
were damaged, the police fund paid $6.8 million to buy the
property in July 2000, $400,000 more than recommended by GVI
Consulting of Santa Ana, California, according to the police
system’s records.

Playing Olde Oaks

Fields and Greene frequently played at Olde Oaks, enjoying
a 50 percent police discount and riding a reserved cart,
according to Ben Chavarria, the course manager. Even as the
business generated losses, the pension poured $2 million more
into upgrades. In the years since, the retirement system has
spent $15.3 million to own and manage a property with an
appraised value of $3.2 million, pension records show.

“If we bought a golf course, you would think that it would
be a moneymaking venture,” says Congemi of Metairie, whose
department patrols the 24-mile (39-kilometer) causeway across
Lake Pontchartrain.

The Olde Oaks investment was a departure from the
conventional blend of stocks and bonds that defined the pension
program’s strategy for most of its 37-year history, based on
plan records. The system’s holdings came to include undeveloped
real estate, foreign currencies, hedge funds and high-yield
fixed-income instruments known as junk bonds.

Surplus in 2001

The system had a $14.1 million surplus in the fiscal year
ended June 30, 2001. Until the following year, trustees
authorized annual cost-of-living increases to retirees. The
average yearly pension in the program is $23,183. Under the
plan, officers contribute 7.5 percent of their pay and qualify
for benefits about equal to their salary after 30 years.

As pension reserves slipped to a $195.2 million deficit in
2002, the trustees revised their investment guidelines to allow
greater risks in pursuit of increased returns, board minutes
show. The new policies included exemptions for investments in
raw land and below-investment-grade debt.

The retirement system also doubled the payback period for
its unfunded liability to 30 years beginning in 2003 and raised
the assumed rate of returns in 2006 to shrink the growing
deficit. It was akin to refinancing a mortgage by extending the
term of the loan and paying only interest without reducing the
principal.

‘Poor Investment Choices’

In July 2004, three police chiefs, including William Landry
of Gonzalez, sued the fund’s trustees in state court. The
complaint sought a restraining order to halt “glaringly poor
investment choices” that included golf courses, a $3 million
headquarters building in Baton Rouge for the program’s staff of
six and business trips by the board and consultants to Monterey,
Las Vegas, San Diego and San Francisco.

“It was like see no evil, hear no evil, speak no evil,”
says Landry, who has since retired. “It was cops ripping off
cops. That, to me, was the biggest slap in the face.”

Less visible to members and state overseers, the board also
eroded internal checks and balances by undercutting the
independence of two professional advisers, according to the
records and interviews.

With no public discussion of potential conflicts of
interest, the trustees in August 2006 hired their independent
actuary as chief investment officer. This gave him the dual
responsibility of selecting the investments he had a duty to
independently evaluate.

The actuary, Charles Hall, insisted on working at his Baton
Rouge home and set his pay at $40,000, with the board’s consent.
No other candidate was considered for the job, according to
board minutes.

Hall’s Dual Role

With Hall as CIO until January 2007, the board bought $2.1
million in Lehman Brothers Holdings Inc. uncollateralized debt
that has since lost 75 percent, as well as $201,916 in Goldman
Sachs Group Inc. home-equity loans that have lost 49 percent,
pension records show. Lehman entered bankruptcy proceedings in
September 2008.

“To be completely independent, you cannot be the
investment officer and serve as the actuary,” says John
Sondergaard, retired actuary for the state’s fiscal watchdog,
the Louisiana Legislative Auditor. After the agency informed the
board it was concerned about Hall’s dual role, the trustees
dropped the CIO position in January 2007 and retained him as
actuary. Hall wasn’t accused of any wrongdoing.

“I think they were right. It was a conflict,” Hall says,
adding that he was only trying to assist the board. He says he
doesn’t recall the Lehman and Goldman investments.

‘Just Looks Bad’

In March 2006, trustees voted to hire their independent
investment consultant, Summit Strategies Group of St. Louis, to
help assemble a hedge fund portfolio. The board was already
paying Summit $250,000 a year to screen money managers and
provide advice on hiring them. The $70 million the trustees
agreed to pour into hedge funds would almost double Summit’s
fee-based compensation. It took the board more than 19 months to
unwind the double role it created.

“It’s not illegal; it just looks bad,” Bossier City
Police Chief Mike Halphen, the board chairman at the time, told
Dan Holmes, a Summit managing director, at a meeting in
September 2007, according to a recording. The trustees began
cashing out the investments.

Holmes, who consulted for the board and presented the hedge
fund investment, said in a voicemail that the relationship
didn’t constitute a conflict.

The use of independent consultants as money managers drew
criticism in the internal investigation of Calpers, the
California retirement program.

‘Could Raise Questions’

“It is difficult to see how an external manager could
objectively advise Calpers on appropriate levels of management
and other fees for its peers and competitors when that advice
could raise questions about the level of its own asset-management fees,” the Steptoe & Johnson LLP law firm in
Washington said it its board-commissioned report.

The Skannal family, who owned the Sligo Plantation
underlying the Olde Oaks golf course, was land rich and cash
poor. John C. Skannal once worked as a state trooper and drove
Governor Earl Long home from a mental institution during his
final term in office in 1960, according to his son A.C. Skannal.

Just before the elder Skannal’s 75th birthday in October
2003, a business partner named Dennis Bamburg visited him in the
psychiatric ward of a Shreveport hospital where Skannal was
being treated for dementia and alcoholism, according to a 2005
lawsuit the family brought against Bamburg in state court.

Witnessing a Signature

Bamburg obtained Skannal’s signature authorizing him to
sell a piece of land next to the golf course, according to the
lawsuit. Bamburg was negotiating with Fields of the police
pension and a local representative of the fund, James Harris,
53, according to trial testimony. The police wanted to develop
the land as a residential community.

In December 2003, the police board approved the purchase of
208 acres (81 hectares) and 70 lots from Skannal and Bamburg in
three transactions that totaled $5.9 million, according to
pension fund auditor’s records. That same month, the trustees
hired Harris as property manager for its planned Olde Oaks
development, a job that paid his firm, Twin Peaks LLC, almost $2
million over six years, not including five lots that he received
as additional compensation, pension records show.

At the closing in February 2004, four representatives of
the police fund -- Fields, Greene, Harris and Zinna -- witnessed
Skannal’s signature and later testified he appeared to be of
sound mind, in the family’s lawsuit against Bamburg. Skannal had
been hospitalized for 112 of the previous 189 days, and his
medical records ran to 8,000 pages, Skannal’s lawyer, John Odom
of Shreveport told a state judge.

‘Grossly Impaired’

After the elder Skannal died in November 2005, his heirs
carried on a suit he had filed eight months earlier in state
court against Bamburg to overturn the deal. In March 2008, Judge
Ford E. Stinson Jr. ruled that Skannal had been “grossly
impaired” and that Bamburg had committed civil fraud in
obtaining the signature. Zinna, Fields and Greene never told the
pension board they testified at the trial, according to former
chairman Halphen and other board representatives. Fields retired
from the board in December 2004.

Bamburg, 63, declined to comment for this story. In the
trial, he argued that Skannal had been of sound mind in the
transaction. A state appeals panel partly overturned the lower
court decision, and Bamburg remains in control of much of the
former plantation.

As the residential development got under way, Zinna
diverted pension-fund money from lot sales and payments to
contractors to pay for his sports-gambling addiction, according
to subsequent state and federal investigations.

Accountants’ Warnings

The police board already had evidence of financial
irregularities in Olde Oaks-related investments from its
independent accountants, New Orleans-based Duplantier, Hrapmann,
Hogan & Maher LLP, board documents show. In a 2002 audit, the
firm reported that unexplained discrepancies included $105,000
the pension plan transferred to the golf course that didn’t show
up on the club’s ledger and $26,125 in “undeposited funds”
that no employee could explain.

Duplantier, Hrapmann issued warnings each year even as
trustees compounded the money-losing investment by buying
another golf course in the Bossier City-Shreveport area -- at a
sheriff’s auction -- and an undeveloped golf course community
near Fredericksburg, Texas.

The board spent $73.4 million on three properties that are
now worth $11.7 million to the plan, according to the system’s
auditors. Homeowners and businesses may also have been cheated.

‘Zinna Took the Money’

Chester Pitts, a 61-year-old heavy-equipment contractor who
lives at Olde Oaks, wrote two checks to the pension system
totaling $158,612 in March and April 2005 for an option to buy
48 undeveloped lots, according to copies of the checks and a
one-page contract prepared by Twin Peaks.

While Zinna endorsed the checks, bank copies show, the
pension fund never received the money and Pitts never got the
lots, according to both parties.

“The problem is that Zinna took the money,” Pitts says.
Zinna denies that and says Pitts is owed nothing.

The trustees removed Zinna from managing Olde Oaks in April
2009 and asked another attorney, Randy Roche, to investigate. A
title search at the county courthouse revealed that Zinna never
deposited $725,563 in proceeds from as many as 22 Olde Oaks lot
sales or even reported the transactions to the retirement
system, Roche says. In addition, court records show, Harris
signed for the police pension as the seller and for himself as
the buyer in one $15,000 cash sale.

Checks for hundreds of thousands of dollars that the staff
wrote for contractors were never delivered, Roche says. Zinna
endorsed the checks and deposited them into his firm’s trust
account, doling out slow and partial payments, Roche says.

Widow’s Savings

In September 2009, Zinna took most of the $570,000
entrusted to him by an unidentified 83-year-old widow and
applied it toward what he owed the police, according to the
federal criminal investigation. A month later, Greg Phares,
chief investigator for the state Inspector General, served a
subpoena and seized records at Zinna’s red bungalow office.

Zinna resigned from the pension system that month. He had
diverted $5.1 million of police funds to himself, most of which
he repaid, while also misappropriating $1.5 million from the
police board and two other Louisiana public retirement systems,
according to his plea agreement unsealed in January.

The Legislature plans next month to take up recommendations
from the funding-review panel to increase taxpayer contributions
that have almost tripled in less than a decade to pay for
pension benefits, losses and expenses, according to the police
plan’s most recent actuarial report.

Baton Rouge Budget

In Baton Rouge, the jump in pension costs amounted to $5
million last year, according to the city’s budget report. That
is equal to 100 officers’ salaries, according to salary.com, a
unit of Wayne, Pennsylvania-based human resources consultant
Kenexa Corp. The city has frozen staff positions and is
budgeting no raises.

Individual police officers also face the likelihood of
paying more for their pensions. The state panel suggested
raising their contributions to as much as 10 percent from 7.5
percent. Municipal authorities pay an amount equal to 25 percent
of police payrolls into the pension system, up from 11 percent
last year. They would pay 28 percent in the fiscal year
beginning July 1 under state actuarial guidelines.

The state review panel also proposed restructuring the
police pension board to include two mayors, an appointee from
the Treasurer’s office and a representative of the state’s chief
budget officer, giving taxpayers a direct voice for the first
time. While two state legislators have been designated honorary
trustees, neither has attended a board meeting in about a
decade, board minutes show.

Awaiting Sentencing

As for Zinna, he still goes to work as he awaits
sentencing, setting out bowls of food and water for the stray
cats that visit him on his law office’s stoop. He faces as many
as 20 years in federal prison. The state Supreme Court suspended
his law license in July, and in December he allowed his state
accounting certificate to lapse.

Stephen Street, the state inspector general who led the
investigation with U.S. authorities, says that criminal law fell
short of addressing all of the police pension system’s
shortcomings.

“Randy Zinna is a symptom of a larger problem over there,
which is a lack of oversight, a lack of accountability,” Street
says. “You can’t conclude anything other than that.”